jot case study - report

TEAM NAME

EKUSHE

UNIVESITY

BANGLADESH UNIVERSITY OF PROFESSIONALS

TITLE

REPORT TO THE BOARD

MEMBERS

Table of Contents

Contents

1.0 EXECUTIVE SUMMARY 3

2.0 INDUSTRY BACKGROUND 4

3.0 STRATEGIC ANALYSIS 4

3.1 Company Analysis 4

3.1.1SWOT Analysis (Appendix A) 4

3.1.2 Ansoff’s Growth Vector Matrix (Appendix B) 5

3.1.3 Porter's Generic Strategies (Appendix C) 6

3.2 Industry Analysis 6

3.2.1 PEST Analysis (Appendix D) 6

4.0 FINANCIAL ANALYSIS (Appendix E) 6

4.1 Profitability ratios 6

4.2 Liquidity Ratio 6

4.3 Activity Ratio 7

4.4 Debt Ratio 7

5.0 WHAT-SO ANALYSIS 8

6.0 SCENARIO ANALYSIS AND RECOMMENDATION 12

6.1 Near-Shoring Proposal in Voldania (Appendix F) 12

6.2 Launching New Range of Toys for 9-11 Age Group 12

6.3 Late Delivery of Christmas Product 13

6.4 Faulty New Flying Spaceship Toy 14

7.0 MAJOR ISSUE ANALYSIS AND RECOMMENDATION 15

7.1 Market Expansion 15

7.2 Reduce Debt 15

7.3 CSR Activities and Product Safety 16

8.0 APPENDICES 17

1.0 EXECUTIVE SUMMARY

This report tries to prioritize the current issues of the management of Jot while

discussing and advising upon them. Through strategic and financial analysis, the

report analyzes the ins and outs of this firm and through a detailed what-so analysis

thoroughly discusses the issues of the firm.

For the near shoring proposal the team suggests to shift production to China based

upon net present value of cost involved while launching new products in the 9-11

age group. The report provides multiple solutions for the late delivery and faulty

toy cases and chose to prefer major customers over small retailers and to repair the

faulty products.

The report further suggests on issues including market expansion, debt reduction

and CSR activities.

2.0 INDUSTRY BACKGROUND

Toy market is a highly seasonal market with most sales occurring in pre-Christmas

periods (October-December). 86% of the world’s toys are manufactured in China

and most of the rest in other Asian countries. China has proved itself as a low cost

quality manufacturer in toy sector. But it does not design and create new products.

3.0 STRATEGIC ANALYSIS

3.1 Company Analysis

3.1.1SWOT Analysis (Appendix A)

Having strength in electronics and connections with a range of manufactures, Jot is

continuously innovating new products every year. With an annual R&D budget of €

1.2 million out of the total revenue of € 9.8 million in 2011, it is clear that Jot gives

major importance to its product development. The company should continue on this

strategy to ensure higher value proposition to the consumers but needs to have a

quality assurance team that monitors the production process as well as the

development stage to ensure no technical failures occur with the products.

With rented warehousing, outsourced manufacturing and transportation it is clear

that uncertainty and management hassle is quite high. The entire process will have

to be monitored with utmost transparency to ensure that the management has

complete control over it.

There are some major untapped market segments that need to be catered in order to

maintain the growth level of Jot. These markets have high growth and can easily be

tapped into with new and advanced range of products that Jot innovates.

3.1.2 Ansoff’s Growth Vector Matrix (Appendix B)

Existing Product-Existing Market

Jot’s major markets include USA and EU markets along with other non-EU

markets in Europe. Of the total revenue, USA market fetched 23.11%. EU 39.73%

and Non-EU European countries 29.04%. These markets will offer little

expansion in the short-term in terms of increased revenue with the current world

wide recessions that have hit most of the developed countries hard.

Existing Product-New Markets

While the USA and European markets are facing recession with austerity in major

EU markets, it’s time to look for alternate markets. Developing markets like

Russia, China and India are the markets that can provide the much needed revenue

growth for Jot. Compared to other markets, the emerging Asia fetched only 8.45%.

These are the markets that are untapped to a great extent and needs major attention.

New Product-Existing Market

When it comes to entering new markets with new products, a major shift in strategy

is necessary. Jot is a company producing toys for children. The current market

trend shows that children are more tech savvy and want more and more products

that offer technologically advanced and user friendly toys.

New Product-New Market

Jot is introducing around 5/6 products every year with an annual R&D budget of €

1.2 million. With the budget for each product development, it can easily focus the

Asian markets where the buying power is generally lower than that of EU and USA

but with a much larger population. Cheaper products concentrating the Asian

markets should allow them to have a more diversified business that are less prone

to major worldwide downturns like the recent subprime crisis that has brought most

of the developed world to their knees.

3.1.3 Porter's Generic Strategies (Appendix C)

Three generic strategies include: cost leadership, differentiation, and focus. Jot is

currently using a combination of Porter's differentiation in terms of product quality

and cutting edge technology and focus strategy for age group.

3.2 Industry Analysis

Just as the internal environment of the business, external factors that affect the

business both in short and long term requires to be analyzed and the management

needs to have a thorough knowledge of it.

3.2.1 PEST Analysis (Appendix D)

The political, economic, social and technological factors shown here affect the

business in every possible way. With a market distributed all over the world, Jot

will have a hard time accustoming itself with all these factors and functions

smoothly. Presently, the technological factors need to be given more importance

since with the advent of mobile aps and technologically advanced products

available to the more tech savvy customers.

4.0 FINANCIAL ANALYSIS (Appendix E)

4.1 Profitability ratios

The Gross Profit margin of Jot is quite good but due to the higher distribution and

administration costs, including development costs of the toys; the operating profit

is quite low. The net profit margin has risen a bit compared to the former year but

still it is very low due to the high finance expenses of the debt capital.

ROA shows that management has failed to effectively generate adequate amount of

profit while ROE is higher than ROA due to higher debt capital.

4.2 Liquidity Ratio

The Quick Ratio is quite high due to the higher amount of trade receivables and is

also lower than that of 2010. The receivable are high as toy market is highly

seasonal and around 30%-55% of the sales occurs in the fourth quarter of the year

i.e. October to December and over 68% of Jot’s sales are dependent on 7 large

retailers and they often don’t pay until at least 60 days after the invoice date.

Though the Current and Quick ratios are pretty good but Jot may face problem in

meeting its short term obligations as the cash ratio is too much low and already the

company has taken an overdraft of €960,000 @12% per year.

4.3 Activity Ratio

The inventory turnover of Jot has risen than that of 2010 resulting a lower

inventory turnover period which means the average number of days the items of

inventory are held for has reduced. The asset turnover ratio has also risen,

meaning that the management of Jot was able to manage the assets more effectively

and efficiently than that of 2010 in generating the sales.

4.4 Debt Ratio

The debt ratio and the gearing ratio in comparison to that of 2010 has fallen but still

is very high meaning that significant portion of the firm’s total asset has been

financed through debt i.e. by the creditors and so greater the firm’s degree of

indebtedness and higher the degree of financial leverage.

As the interest cover ratio is higher than 1 Jot can meet up its interest expenses

from the loans and overdrafts.

5.0 WHAT-SO ANALYSIS

Segment | The What | Implications |

Jots inception and history | Husband and wife team company | Jot started as a

family company |

| | |

| Substantial revenue growth | The company surely gained a success height within a

very short time |

Jot’s product range and service age group | Their product range is for two age

groups; 3 to 5 years and 5 to 8 years | These two age group receive most toys in

quantity and most amount of money is also spend |

| Absent of 9 to 11 age group toys | High margin as well as risk missed. |

| Own designed toys and licensed toys | Diversified product line |

| Electronic features of toys | Competitive advantage and successful branding and

positioning |

| 5 new products each year as well as other new aspects of current products | Jot is

keeping up with the trend of market. |

| Unique range of toys without any modification for years | Successful branding in

the minds of customers |

| | |

| 50%-100% mark up prices by retailers | Barrier creating a risk for Jot |

Production of Toys | In-house team of designers | More uniqueness in designing |

| New technology electronic chip | Attractive to retain and capture new customers |

| Researching the market trends | Continual development |

| More than 12% of the total revenue are invested for design and development | The

timing of research and development is good as it helps to launch the new

Target Markets for Growth | Targeting new markets- Russia and Asia | Implies the

increasing capacity and capability |

| Direct shipment | This indicates to a good management team of Jot’s. |

Corporate Social Responsibilities and Product Safety | CSR plan to be developed in

next year | May affect the function of the company in case market extension and

penetration |

| No mention of Jot’s “CE” marking | Regulatory Issues. |

6.0 SCENARIO ANALYSIS AND RECOMMENDATION

The team has gone through the scenario and found some major issues that need

immediate attention. We have taken the liberty to analyze them and arrange them

according to their priorities as we saw fit.

6.1 Near-Shoring Proposal in Voldania (Appendix F)

The management is pondering over the thought to shift its production gradually to

Voldania from China due to increasing cost.

6.1.1 Strategic Viewpoint: China produces 86% of the world’s toys but their

production cost is rising and coupled up with unreliable supply concern. However,

working in Voldania requires ability to make some cunning maneuvers including

personal donation to influential parties. This might breach the code of ethics. Even

though Jot has built up a good relation with its suppliers through repeat business

and can avail special favors, all decision will have to be based upon the financial

data.

6.1.2 Financial Viewpoint: The NPV (Net Present Value) the 5 year investment if

based in Voldania totals, €2,717,025.876 while that of China €2,948,991.70 as

shown in Appendix ()

6.1.3 Operational Viewpoint: Jots market is mostly based in Europe and USA. A

shift in production to Voldania will improve responsiveness of delivery to their

warehouse or directly to customers while making the logistics to gain favorable

efficiency.

6.1.4 Recommendation: Based upon our estimate, the business needs to shift its

production to Voldania to for better business performance.

6.2 Launching New Range of Toys for 9-11 Age Group

Jot does not cater to the 9-11 age group at the moment and Alana Lotz, Product

Development Director of Jot is thinking about introducing a range of products

including a smartphone application that has both gaming and educational aspect.

6.2.1 Suitability: Even though Jot is quite strong technologically, but mobile

application is an arena where Jot is inexperienced and lacks expertise. Though it

can be lucrative, there is also higher level of risks involved since major change in

human resources will have to be brought about in a very short time and entering a

new market will make them face stronger competitors.

6.2.2 Acceptability: There has been a tremendous growth in use of smartphone all

around the world. Children now-a-days have access to such gadgets and the margin

for such a product is much higher.

6.2.3 Feasibility: The age group of 9-11 offers the highest margin and will also

retain customers who have been using Jot’s products all their life whereby

increasing the chance of repeat buying. The projects estimated cost of €30,000 is

easily affordable considering the fact that average design and development cost per

year is €1.2 million with each project receiving anything between €0.1 to €0.25

million.

6.2.4 Recommendation: The market is untapped and this is high time for Jot to

enter the market so long as it is financially viable since this segment has a promise

to grow as fast as ever and will help Jot continue the tremendous level of growth it

has been experiencing. Everything still depends upon the cost benefit analysis.

6.3 Late Delivery of Christmas Product

Supply was hampered by one of the manufactures who is thought to be giving

preference to its larger buyers leading to a situation where Jot may fall back in

delivery of Christmas products. The supplier will be able to supply 75% of the

order in time. So, there are two options for Jot to follow:

1. Send all 75% of the products to its major customers. who number around 7 and

control 68% or Jots product sales. This will ensure that the major customers do not

get annoyed and disrupt the existing business relationship that could otherwise

hamper the future relationship with them.

2. Proportionately distribute the products to all the customers so that the

independent toy shops at least get a portion of what was ordered on time. By

ensuring this, Jot will show that they are giving equal importance to the small

retailers.

6.3.1 Recommendation: The business should take the first suggestion whereby

supplying the entire amount to its major customers and ignore the independent ones

until the next delivery. Otherwise, the relation with big retailers will deteriorate and

that is something Jot cannot afford right now. In regard to the compensation, all

depends upon the long term strategy of Jot. If they opt to shift production from

China to Voldania, then they can charge compensation to the suppliers for their

error that will cost Jot substantial amount both monetarily and in terms of goodwill

with its customers. If they do not shift their production, they had better not go for

any fine and instead formulate a process whereby no such thing can occur. For

instance, they can order increased amount to a much smaller group of reliable

suppliers to whom Jot can be a preferred customer due to the volume of orders

whereby enjoying a much better service in return.

6.4 Faulty New Flying Spaceship Toy

A major fault in the toy has been found that has seen complaints of overheating and

in some cases smoke was seen by customers. Joy has three options:

1. To spend additional €10 per unit on improved insulation for the already

produced units at hand that includes any additional distribution costs. Jot already

has 3200 inventory and so if they sell these to the retailers they can make a profit of

€19200 {3200*€(40-24-10)}.

2. To sell the product at the discount market where toys of inferior quality are sold

at 50% less than the conventional market price. As such the loss occurring would

be €12800 {3200*€(40*.05-24)} but might have a negative effect on the brand

image.

3. To dispose of the product at hand and completely write off the product. Here

they will account the loss of €76,800 (€24*3200).

6.4.1 Recommendation: Here, Jot option 2 and 3 will lead to loss and considering

the fixed cost obligation like interest and debts payments. Option 2 cannot be

chosen since this will affect the brand image. Option 3 on the other hand will save

the company from further damage to reputation but it will also show their

incompetency to produce a functioning product. Considering all options, option 1

would be the best choice.

7.0 MAJOR ISSUE ANALYSIS AND RECOMMENDATION

Apart from those mentioned in the scenario, the team has identified some issues

that need to be resolved immediately after taking care of the scenario cases. The

following issues are arranged as per their perceived priority.

7.1 Market Expansion

In order to continue the 18% revenue growth, Jot will have to expand its market

and enter the Asian and Russian market. These markets have demand for Jot’s

products and their ever increasing number of middle class will fuel the growth to a

much higher level. Their expansion strategy might include:

1. Joint Venture with local retailers whereby opening outlets and also supplying

other retailers there. This will not cause conflict in interest with their existing major

buyers in Europe and America.

2. Opening personal outlets- This will require substantial amount of fund and Jot

is already riddled with debt and will not be suitable for Jot to open a new outlet on

his own as the risk is higher and can negatively affect the performance of the core

function.

7.1.1 Recommendation: Option 1 should be chosen since it brings about increased

margin by replacing a major player in the supply chain that requires minimal

amount of investment.

7.2 Reduce Debt

With a gearing ratio of 63.19%, Jot is riddled with debt capital. It makes raising

further capital expensive and so there is a strong need to reduce the amount of debt.

To fuel its growth, Jot can choose from:

1. To convert into a Public Limited Company and raise capital from through IPO.

2. They can raise additional capital since they have not crossed the authorized

capital

7.2.1 Recommendation: Option 2 will be the best.

7.3 CSR Activities and Product Safety

Well publicized CSR activities should be formulated and can include partnership

with organizations like UNICEF-Save the Children that creates a global impact. Its

products or packages can help spread the messages for UNICEF.

8.0 APPENDICES

Appendix A: SWOT Analysis

Strength (S) | Weakness (W) |

* Positive branding in customer's mind, quality electronic toys * Substantial

sales revenue growth rate * Own in-house designers team accompanied by

necessary replacement when required * Updated electronic featured products *

High level of understanding and commitment between the company and

manufacturers * Separate marketing and sales team * Direct interface with

outsourced manufacturers by means of standardized CAD/IT system | * Products

for limited age group * Dependency on manufacturers and retailers * Not

having own warehouse but leased ones * No manufacturing and logistics

facilities of the company * Funding constraint as a private limited company *

High level of accounts receivables and payables * Less effective IT system as it

fails to provide all of the data required * Sales are significant only during Q3 and

Q4 * Lack of comprehensive CSR plans |

Opportunity (O) | Threat (T) |

* Introduction of products for other age groups which are yet to be addressed *

Market expansion and penetration strategy for Asian and Russian markets *

Near-shoring to have some Europe based outsourced manufacturers * Using the

manufacturers existing product lines to introduce new products * Focusing on

improvement of relationship with manufacturers in order to encounter future

critical period * Launching special programs with new products during events

like Olympic, World Cup, Euro Football to boost up sales * For capital raising

may go for initial public offering after conversion into a private limited company |

* Near-shoring, marketplace competition and competitive pricing by competitors

* Little influence over large retailers * Dependence on few manufacturers

increases buyers power and may result in low profit margin for company *

Exchange rate risk, market risk and risks associated with raw materials suppliers *

Changes in economic & political conditions of countries concerned * Potential

changes in global and national policies * Possibility of arising unethical demands

from manufacturers and retailers |

Appendix B: Ansoff’s Growth Vector Matrix

Increasing Risk

| Existing Products | New Products |

Existing Markets | Market Penetration (Lowest Risk) * Europe and USA Markets

| Product Development (Medium Risk) * Developing New Products for 8+ Age

Group |

New Markets | Market Development (Medium Risk) * Developing Russian and

Asian Markets | Diversification (Highest Risk) * Brand and Line Extension |

Appendix C: Porter’s Generic Strategy Analysis

Differentiation Strategy | * Jot brand name is the synonym of quality electronic

toys. So the quality toys of Jot differentiate it from its competitors quite easily. *

Jot’s product portfolio mainly includes electronic features. This is seen as one of

the strengths which differentiate Jot’s products from others. * The company has a

policy of launching around 5 totally new products each year. These new innovative

products have appeal to the targeted age groups and that is proved in the past. *

It also enhances certain aspects of some of its existing products each year to refresh

their appearance and features. This also helps Jot to maintain unique featured

products in the event of copying by competitors. |

Focus Strategy | * Jot is currently focusing on the pre-school age group of 3 to 5

year olds and the next age group of 5 to 8 year olds. One of the reasons behind

focusing on this age group could be that the most money is spent on toys for the 6

to 8 year age group according to research. * In terms of products, Jot’s main focus

is on electronic featured ones which substantial growth rate. * At present, Jot’s

focus point for sales is the European and U.S.A markets as they are key revenue

drivers. * Considering manufacturing, Jot’s focal point is China at present with

considerably cheap labor. * Jot mainly focuses on 7 large customers (including

retailers and stores) which are its key revenue drivers. * The peak of Jot’s sales

occur pre-Christmas sales period. So this is the focus period to extract as much as it

can from the market. |

Appendix D: PEST Analysis

Appendix E: Financial Ratios

Profitability Ratio

| 2011 | 2010 |

Gross profit margin | 3147/9866= 31.9% | 2756/8371= 32.92% |

Operating Profit Margin | 551/9866= 5.58% | 453/8371= 5.41% |

Net Profit Margin | 246/9866=2.49% | 185/8371=2.21% |

Return on Assets (ROA) = profit for the period/total assets | 246/5378=4.57% |

185/4393=4.21% |

Return on Equity (ROE) = Earnings available for common stockholders/ Common

Stock Equity | 246/932=26.40% | 185/686=26.97% |

Liquidity Ratio

| 2011 | 2010 |

Current ratio | 4628/2846=1.63 | 3672/2107=1.74 |

Quick or Acid test Ratio | (4065+21)/2846=1.44 | (3173+29)/2107=1.52 |

Cash Ratio | 21/2846=.0074 | 29/2107=.0138 |

Activity Ratio

| 2011 | 2010 |

Inventory Turnover =cost of goods sold/ Inventory | 6719/542=12.40 |

5615/470=11.90 |

Inventory Turnover period | 365/12.40=29.44 days | 365/11.90= 30.67 days |

Asset Turnover Ratio = Sales/Capital Employed | 9866/(932+1600)= 3.90 times |

8371/(686+1600)= 3.66 times |

Debt Ratio

| 2011 | 2010 |

Debt ratio =total debt/ total Assets | (1600+2846)/5378=82.67% |

(1600+2107)/4393=84.38% |

Interest Cover Ratio/ times interest earned ratio =(operating income)/interest charge

| 551/213=2.59 times | 453/201=2.25 times |

Gearing Ratio =total long term debt/ Capital employed (shareholders equity+ long

term debt) | 1600/(932+1600)=63.19% | 1600/(686+1600)=70% |

Appendix F: NPV Calculation

Voldana

| year 0 | year 1 | year 2 | year 3 | year 4 | year 5 |

| | | | | | |

Donation | € 25,000.000 | | | | | |

Production unit | | 60,000.000 | 100,000.000 | 140,000.000 | 180,000.000 |

220,000.000 |

Labor hours(.45 hours per unit) | | 27,000.000 | 45,000.000 | 63,000.000 |

81,000.000 | 99,000.000 |

Labor cost per hour | | € 5.000 | € 5.100 | € 5.202 | € 5.306 | € 5.412 |

Total labor cost | | € 135,000.000 | € 229,500.000 | € 327,726.000 | € 429,786.000 |

€ 535,788.000 |

Machine Cost per unit | | € 1.960 | € 1.960 | € 1.960 | € 1.960 | € 1.960 |

Total Machine Cost | | € 117,600.000 | € 196,000.000 | € 274,400.000 | €

352,800.000 | € 431,200.000 |

Distribution Cost per unit | | € 1.200 | € 1.272 | € 1.348 | € 1.429 | € 1.515 |

Total Distribution Cost | | € 72,000.000 | € 127,200.000 | € 188,720.000 | €

257,220.000 | € 333,300.000 |

Value For The Year | € 25,000.000 | € 324,600.000 | € 552,700.000 | € 790,846.000

| € 1,039,806.000 | € 1,300,288.000 |

Discount Factor | 1.000 | 1.120 | 1.254 | 1.405 | 1.574 | 1.762 |

| | | | | | |

PV | € 25,000.000 | € 289,821.429 | € 440,749.601 | € 562,879.715 | € 660,613.723 |

€ 737,961.407 |

| | | | | | |

NPV | € 2,717,025.876 | | | | | |

China

| year 1 | year 2 | year 3 | year 4 | year 5 |

| | | | | |

Production unit | 60,000.000 | 100,000.000 | 140,000.000 | 180,000.000 |

220,000.000 |

Labor hours(.6 hours per unit) | 36,000.000 | 60,000.000 | 84,000.000 | 108,000.000

| 132,000.000 |

Labor cost per hour | € 1.750 | € 1.960 | € 2.195 | € 2.459 | € 2.754 |

Total labor cost | € 63,000.000 | € 117,600.000 | € 184,380.000 | € 265,572.000 | €

363,528.000 |

Machine Cost per unit | € 1.400 | € 1.400 | € 1.400 | € 1.400 | € 1.400 |

Total Machine Cost | € 84,000.000 | € 140,000.000 | € 196,000.000 | € 252,000.000

| € 308,000.000 |

Distribution Cost per unit | € 3.000 | € 3.180 | € 3.371 | € 3.573 | € 3.787 |

Total Distribution Cost | € 180,000.000 | € 318,000.000 | € 471,940.000 | €

643,140.000 | € 833,140.000 |

Value For The Year | € 327,000.000 | € 575,600.000 | € 852,320.000 | €

1,160,712.000 | € 1,504,668.000 |

Discount Factor | 1.120 | 1.254 | 1.405 | 1.574 | 1.762 |

| | | | | |

PV | € 291,964.286 | € 459,011.164 | € 606,633.452 | € 737,428.208 | € 853,954.597

|

| | | | | |

NPV | € 2,948,991.707 | | | | |

jot case study - report

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